The Politics of Economic Strategy

Aswan High Dam made possible large land reclamation and electric
power generation projects.Courtesy Susan Becker

The most important decision taken by the Egyptian government
since Nasser was Sadat's infitah to foreign and domestic
private capital. While the stagnation of the early 1970s raised the
issue of economic reform, the decision to implement infitah
did not take place in a political vacuum. A number of different
elite factions prescribed different solutions to the economic
problems. A handful of Marxists favored a "deepening" of the
socialist experiment. Another small group called for a rapid move
to free-market capitalism. The third,
statist (see Glossary) trend,
led by Prime Minister Aziz Sidqi, stood for a controlled role for
private and foreign capital compatible with the dominance of the
public sector. In May 1973, Sadat dismissed Sidqi, who was an
influential possible rival associated with the Nasser era, and
before long outstanding leftists, such as Minister of Planning
Ismail Sabri Abdullah, were also forced out. The dominant thinking
that emerged advocated creation of a new foreign sector,
restriction of the public sector to large industry and
infrastructure, and the opening of all other sectors to private
capital. Some of Sadat's closest confidants, major figures of the
Egyptian bourgeoisie such as Osman Ahmad Osman and Sayyid Marii,
played major roles in swinging him toward this option. The
legitimacy won in the October 1973 War gave him the strength to
make this break with Nasserism.

Egypt's state-dominated economy, Sadat declared, was too
burdened by military spending and bureaucratic inertia to mobilize
the resources for an economic recovery. But postwar conditions,
namely the diplomatic opening to the United States and the new
petrodollars in Arab hands, presented a unique opportunity to spark
a new economic take-off combining Western technology, Arab capital,
and Egyptian labor.

An infitah would also consolidate Sadat's support among
the Egyptian landed and business classes and among the state elite
who had enriched themselves in office and were seeking security and
investment outlets for their new wealth. In addition, Sadat viewed
infitah as essential to winning American commitment to
Egypt's recovery of the Sinai Peninsula from Israel.

Abdul Aziz Hijazi, a long-time minister of finance and liberal
economist with links to Western and Arab capital, was appointed
prime minister in 1974, charged with implementing the
infitah. To neutralize resistance inside the state, Sadat
encouraged a "de-Nasserization" campaign in which all those who had
grievances against socialism publicly attacked it for having ruined
the economy. As the emerging ills of infitah--inflation and
corruption--generated discontent over the new course, Hijazi was
sacked, and Mamduh Salim, Sadat's police "strong man," took over as
prime minister with a mission to push ahead with infitah,
overruling those who were obstructing it and those who were abusing
it.

Once infitah was established as Egypt's economic
strategy, intraelite conflicts centered on its proper scope and
management. These conflicts typically pitted liberalizing
economists, who were convinced that a fully capitalist economy
would be more efficient than an economy incorporating a public
sector, against more statist-minded bureaucrats and state managers,
who wanted to reform, rather than to dismantle, the public sector.
The latter were often allied with politicians fearful of public
reaction to the rollback of populist measures such as subsidies and
public- sector employment. One major episode in this conflict came
in 1976 over pressures from the International Monetary Fund
(IMF-- see Glossary) and
foreign banks to cut subsidies and devalue the
Egyptian pound (for value of the
Egyptian pound--see Glossary) as
necessary steps in the liberalization of the economy. Sadat's
minister of economy, Zaki Shafii, and his minister of finance,
Ahmad Abu Ismail, fearful of the consequences on the mass standard
of living, urged him to resist pressures for rapid reform. But
other economists, chief among them Abdul Munim Qaysuni, argued that
Egypt could not afford costly welfare programs if it were to
revitalize its productive bases. Top Western bankers, such as David
Rockefeller and William Simon, urged Sadat to go beyond half
measures if he wanted to make the infitah a success. Sadat
overruled his own ministers and replaced them with a new team
headed by Qaysuni, who began to cut the subsidies. But decision
makers had misjudged their political environment. The subsidy cuts
triggered the 1977 food riots, which shattered much of the support
Sadat had carefully built up. The government backed down and did
not again attempt such a radical cut in the social safety net for
the poor.

Managing infitah remained the major problem of public
policy under Mubarak. Rather than producing a dynamic capitalist
alternative to Nasserite statism, infitah had stimulated a
consumption boom that put Egypt in debt and made it heavily
dependent on external revenues, which declined in the mid-1980s,
plunging the country into economic crisis. Mubarak insisted that
infitah would be reformed, not reversed, but the
government's freedom of action was limited by conflicting domestic
constraints. The interests created under Nasser remained obstacles
to capitalist rationalization and belt-tightening. The public
sector was still the main engine of investment, and public sector
managers and unionized labor tenaciously defended it. The
bureaucracy, employing a large portion of the middle class, was a
formidable constituency. Meanwhile, Egypt's huge army had not been
demobilized, and, indeed, Sadat had bought its acquiescence to his
policy by replacing weapons from the Soviet Union with more
expensive arms from the United States, for which the military
showed a voracious appetite. Marshal Abu Ghazala rejected demands
by Prime Minister Ali Lutfi that he pay off Egypt's military debts
from revenues of arms sales overseas; instead he plowed funds into
subsidized apartments, shops, and sports clubs for the officer
corps. Populist "rights" acquired under Nasser had grown into a
tacit social contract by which the government provided subsidized
food to the masses in return for their tolerance of growing
inequality. The contrast between the conspicuous new wealth and the
mass poverty generated a moral malaise, making Egypt's debt a
political issue. "We're asked to pay the debt," chanted
demonstrators in 1986, "while they live in palaces and
villas." Thus, attacking populist policies seemed likely to fuel
Islamist political activism.

Infitah had itself, however, created interests resistant
to reform. A larger and richer bourgeoisie was unprepared to give
up opportunities for enrichment or to trim its level of
consumption. Any reversal of the course that so favored this class
would have cost the regime its strongest social support. Indeed,
the increasing power of the bourgeoisie was manifest in its
successful veto of several government reform initiatives. Prime
Minister Ali Lutfi was expected to produce difficult reforms but
was stymied by powerful business interests. The ability of the
regime to raise domestic revenues to cope with the financial
imbalance was limited because those who could pay represented the
government's own support base. Thus, when importers staged
demonstrations against increased customs duties, the government
rescinded the duties, and the ruling party parliamentary caucus
turned back its own government's proposal to tax lucrative urban
real estate interests.

Caught between rich and poor, the regime opted for
incrementalism. It gradually shaved subsidies, replacing the one
piaster
(see Glossary--about one United States cent) loaf of
bread with a supposedly better quality, higher priced loaf; raising
electricity prices; and eliminating subsidies on feed corn. The
regime also partially reformed the exchange rate and raised taxes
on imported luxuries. But, unable to undertake radical reform, it
chiefly concentrated on negotiations with creditors for a
rescheduling of debts, lower interest rates, and new loans to
support the balance of payments, merely postponing the day of
reckoning.

The growing power of the bourgeoisie and the determination of
Mubarak's state to maintain its independence from this class was
reflected in another case of economic policy making, a battle over
control of foreign currency. The government wanted this control in
order to protect the value of the Egyptian pound. In 1985 Minister
of Economy Mustafa Said tried to close down black-market money
changers who absorbed most workers' remittances but was dismissed
when foreign currency dried up and business demanded his head. In
1986 the Lutfi government fell because of a bid by the governor of
the Central Bank, Ali Nijm, to rein in the Islamic investment
companies that also dealt in foreign currency. The new power of
this rising independent bourgeoisie resulted from its ability to
disrupt the economy, its payoffs to the press, and its connections
to the political opposition and inside the elite itself. In 1988
Prime Minister Atif Sidqi personally led the government's efforts
while the companies mobilized the Muslim Brotherhood (Al Ikhwan al
Muslimun; also known as the Brotherhood) and the New Wafd Party in
defense of the private sector. Aided by financial scandals that
damaged depositor confidence, the government brought the companies
under its regulative sway, but they retained considerable autonomy.
Whereas Mubarak's state was no longer a mere champion of bourgeois
interests as was the state under Sadat, neither had it regained the
power over society of Nasser's days.

Despite the power of elites, they did not operate in a vacuum.
Many of their decisions were reached in response to economic
pressures that sharply limited their options. They also had to
consider the political consequences of their decisions. The major
change from Nasser's era was that the bourgeoisie acquired the
capacity to advance and defend its interests in the system; the
1977 riots made clear, however, that mass reaction must also be
included in regime calculations. Thus, while the Egyptian state
remained essentially authoritarian, decision makers could not
ignore societal wishes, nor could they escape environmental
constraints.

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